Financial Planning Includes Budgeting — What Should You Include in Your Budget?

U.S. Money Reserve
8 min readJan 29, 2020


Financial planning isn’t just about talking to an accountant to manage your investments. You need to create a budget, too. Here’s how.

by Scott Schmidt, Chief Financial Officer of U.S. Money Reserve

When you think of financial planning, you probably think of things like your retirement account, investments, insurance, debt, and savings. While those are all critical components of a well-thought-out financial plan, one key thing to include in your planning is your budget.

How vital is budgeting to your financial plan? According to a survey by ValuePenguin, a LendingTree-owned site, the average consumer carries around $5,700 in credit card debt as of January 2020, which means Americans are spending more than their income. Add to that the fact that, according to a recent study by, most Americans don’t have a budget, but they certainly think everyone should have one. It’s no surprise that Americans are facing more than $4 trillion in consumer debt.

Budgeting, however, is about a lot more than just debt. While your amount of debt is an excellent data point to have, getting down to the nitty-gritty details in a budget is what really matters the most. Knowing what to include in your budget is key to getting a financial handle on your spending and saving habits, so what should you include in your budget? What are the important factors to take into consideration when setting a budget? Read on to find out.

What is a budget?

First, you need to understand exactly what a budget is.

A budget essentially provides a road map for your spending, both current and future. It gives you a way to visualize what you have, what you want, and what you need. While many people associate the word “budget” with restriction, it doesn’t necessarily have to be that way.

Budgets aren’t like diets; they are more like lifestyle changes. They just take a little bit of getting used to.

A budget offers a way to see where your money goes and how much comes in — and budgeting gives you the opportunity to get a better handle on your spending habits.

There are plenty of ways to approach creating a budget. Whether you choose to handwrite one — as you would in the Kakeibo-style of budgeting — or use a program like Excel or an app like Mint, Personal Capital, or YNAB (You Need A Budget), budgeting means that you keep track of the money that both comes in and goes out on a daily, weekly, monthly, and yearly basis. Keeping track of this will help you know more about your spending (and saving) habits and help you make better financial decisions.

Budgeting is so crucial that back in 2017, the Consumer Financial Protection Bureau, or CFPB, did a study on the struggles that consumers have around budgeting. They found that all of us struggle with day-to-day expenditures the most and tend to overspend and do damage to both our long-term and short-term financial well-being.

What kinds of personal budgets are there?

If you’re new to budgeting, you may think that there is only one type of budget out there — but, just like there are different kinds of diet plans you can follow, there are a wide variety of budget plans that you can use. A few examples of common types of budgets include:

Zero-based budgeting: This type of plan suits those of us who tend to overspend and go into debt on a regular basis. The zero-based budgeting plan puts every cent of your income to work by allocating it to savings, debt, and expenses every month. At the end of the month, your income minus your expenditures will equal zero. For more on zero-based budgeting, check out this story over at the personal finance site NerdWallet.

The envelope budget: If you use cash for everything, this is probably the right budget for you. You use envelopes to physically budget out the cash you’ll need for the month. Once the money in the envelope is gone, you’re done spending. There are digital versions of this, too, in the form of apps like Mvelopes and Goodbudget.

The percentage budgeting method: This method allows you to portion out a specific percentage of your income to go toward saving, debt, and household expenses — or, in simpler terms, wants, needs, and savings/debt. There are a ton of different options for how to portion out this kind of budget, so if you choose this method, be sure you find the option that works for you. The best way to find the right budgeting style for you is to know more about your spending habits before choosing. The most common percentage budgeting methods are the 50/30/20 and the 60% budget system.

The “pay-yourself-first” budget: This system puts a priority on savings first. One example of a pay-yourself-first budget might be using your 401(k) to save for retirement and then using the rest of your income to pay for necessities and debt.

There are so many different budgeting styles out there that it pays to do a little digging before you put pen to paper and set up a budget for you and your family. Budgeting that works for you has to work with your psychology so that it can be successful. So it’s essential to know how you spend and what your habits are before settling on a plan.

What should you include in your budget?

Creating a budget means being able to capture all your spending and your goals, dreams, wishes, and debt in one place. While that may sound like a tremendous task, you can break it down into bite-sized pieces to make it more attainable. Here’s how.

Figure out your “after-tax income,” or “take-home pay”

Before you start creating a budget, you need to determine what your after-tax or take-home pay is per month. To do that, take a look at your paychecks and add them up for the month. That’s your after-tax income.

Once you’ve figured out what your take-home pay is, you can move onto the next step to figure out what to include in your budget.

Create buckets or categories of spending and saving

The first thing you should do is create buckets of types of spending you do. Based on what you know about your spending style and what your goals are, you can choose a budgeting method above and divide your spending into the designated buckets.

For example, if you use the 50–30–20 method, you’d create three buckets of spending that would include your needs (50%), wants (30%), and savings (20%). If you were using the zero-based budgeting system, you’d track your spending for a few months and then divide the items up into categories to get an idea of where your money goes.

Keep an eye on the prize: What are your financial goals?

Once you have figured out your spending habits, it’s time to think about what your financial goals might be. Are you saving for a house? Retirement? A child’s college fund? Determine how much money you want to have, or need, and what your timeline is. Once you have your goals in mind, you can start putting a plan and a budget into place to achieve those goals.

Include everything in your budget: nondiscretionary vs. discretionary spending

In order to set yourself up for success, you need to include everything in your budget. There are two categories of spending: discretionary and nondiscretionary — or extraneous and core. Nondiscretionary or core spending includes basic needs like shelter and clothing. Discretionary or extraneous spending would include things that are optional.

Things to include in a typical household budget that are nondiscretionary or core expenses would consist of:

Rent or mortgage payments: This is straightforward — how much do you have to spend to house yourself each month?

Insurance: This includes home, renters, car, health, and any other kind of insurance you pay for regularly.

Home maintenance and fees: Do you have a lawn that needs to be taken care of every week? What about painting or maintaining the outside or inside of your home or apartment? Do you have to pay a homeowner’s association (HOA) for the use of common areas? Include these things in your budget.

Utilities: Include expenses here for cell phones, Internet connectivity, garbage, sewer or septic maintenance or fees, electricity, water, natural gas, etc. What keeps the lights and heat (or in places like Texas, where I live, the air conditioning) on?

Transportation: Car payments, fuel, and public transportation or regular ride shares should be included in this.

Groceries and food: What do you spend on feeding yourself and your family?

Medical Bills: Do you have recurring medical bills or regular medical costs that you need to pay for (prescriptions, physical therapy, etc.)?

Childcare or schooling: What do you spend each month on childcare while you are at work? What would you like to save for a child’s education in the future?

Taxes: Regular property taxes or car taxes and registration are due each year. Make sure you include these in your budget estimate.

Retirement: It’s essential to include retirement savings in your budget as well since this is what you will live off of in the future.

Emergency funds: A general rule of thumb is that you should save anywhere from three to six months’ worth of cash for an emergency like a job loss or an accident that prevents you from working and earning money. Be sure to have an emergency fund for issues that can and will crop up.[K1]

The second category of costs to consider is discretionary spending. This would include:

Eating out or restaurant expenditures: These expenses often sneak up on people because they are not frequently included in budgets. If you eat out a lot, be sure to include this cost in your budget.

Travel: Everyone needs a break now and then. Be sure to save for any travel you want to do in the future.

Gifts: Does a loved one have a big birthday coming up? Do you want to get engaged or married soon? Do you like to give gifts around the holidays? Be sure to include these costs in your budget.

Gym and health club memberships: Do you have a gym membership or belong to a health club, yoga studio, or even a spa that charges a regular fee? Be sure to include it.

Recurring entertainment fees: This includes monthly fees for Netflix, Amazon, Hulu, etc. Be sure you include any other entertainment costs here, too.

Clothing expenditures: How frequently do you or your loved ones need new clothes? Keep this in mind as you are building your budget.

Those little things: Do you tend to shop when you’re bored, sad, lonely, or happy? Do you buy stuff you don’t really need? Keep this in mind when you are creating a budget.

While there are plenty of other things to include in a budget, the above list will serve as a good jumping-off point when preparing a household budget. Use this list as a way to think about where your money goes each month, and you will be well on your way to creating the right budget for you and your family.

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